Derivatives and Systemic Risk: What Role Can the Bankruptcy Code Play?
- Tags:
- Bankruptcy,
- Business Operations,
- Columbia University,
- Derivatives,
- Financial Services,
- Litigation
- Source:
- Columbia University
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Overview: In Fall 1998 the Federal Reserve Bank ("Fed") arranged a bailout of the massive hedge fund, Long Term Capital Management (LTCM), which faced the prospect of immediate liquidation if it filed a petition under Chapter 11 of the Bankruptcy Code. Although the Code generally prevents creditors from seizing assets of firm in bankruptcy (also called the "automatic stay"), counterparties to derivative contracts receive special treatment under the Code and are free to terminate contracts and seize collateral to the extent they are owed money. The authors' analysis suggests that the Congress' attempt to mitigate systemic risk in OTC derivatives markets by providing special treatment of derivatives under the Bankrutpcy Code is unnecessary and misguided.
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Format: PDF | Size: 48KB | Date: Jan 2005 | Pages: 13
